Monday, June 12, 2017

Stephen Roach Rethinking the Next China

From Project Syndicate, May 25:

NEW HAVEN – For the
past seven years, I have taught a popular class at Yale, called “The
Next China.” From the start, the focus has been on the transitional
imperatives of the modern Chinese economy – namely, the shift from a
long-successful producer model to one driven increasingly by household
consumption. Considerable attention is devoted to the risks and
opportunities of this rebalancing – and to the related consequences for
sustainable Chinese development and the broader global economy.

While many of the key
building blocks of China’s transitional framework have fallen into
place – especially rapid growth in services and accelerated urbanization
– there can be no mistaking a new and important twist: China now
appears to be changing from an adapter to a driver of globalization. In
effect, the Next China is upping the ante on its connection to an
increasingly integrated world – and creating a new set of risks and
opportunities along the way.

The handwriting has
been on the wall for several years. This strategic shift is very much a
reflection of the leadership imprint of President Xi Jinping – in
particular, his focus on the “China Dream.”
Initially, the dream was something of a nationalist mantra, framed as a
rejuvenation by which China would recapture its former position of
global prominence, commensurate with its status as the world’s second
largest economy.

But now the China Dream is taking shape as a concrete plan of action, centered on China’s One Belt, One Road
(OBOR) plan. This ambitious pan-regional infrastructure initiative
combines economic assistance with geostrategic power projection,
supported by a new set of China-centric financial institutions – the
Asian Infrastructure Investment Bank (AIIB), the New (BRICS) Development
Bank, and the Silk Road Fund.

For those of us
studying China’s economic transformation, this is hardly a trivial
development. While the shift remains a work in progress, I would stress
three tentative implications.

First, China has not
made a full about-face. As an economist, I am prone to placing too much
emphasis on models and on the related presumption that policymakers can
flip the switch from one model to another. Yet it is not that black and
white – for China or for any other country.

China’s leaders have,
for all practical purposes, now conceded that a consumer-led growth
strategy is tougher to pull off than originally thought. The consumption share of GDP
has risen just 2.5 percentage points since 2010 – far short of the
boost to personal incomes that might be expected from the
7.5-percentage-point increase in the share of services and a
7.3-percentage-point increase in the high-wage urban share of its
population over the same period.

This disconnect
largely reflects a porous social safety net that continues to foster
high levels of fear-driven precautionary saving, which is inhibiting the
growth of discretionary consumption. While still committed to
urbanization and services development, China has elected to draw on a
new external source of growth to compensate for a shortfall of internal
demand.

Second, this global
push has many of the features of the old producer model. It enables an
increasingly worrisome overhang of domestic excess capacity to be
directed at OBOR’s infrastructure requirements. And it relies on
state-owned enterprises (SOEs) to drive that investment, forestalling
long-needed reforms in this bloated segment of Chinese industry....MORE